By Morgan Smith
When you consider how many countries are trying to make progress economically and have to build up infrastructure like factories and bridges, the expectation is that they are going to need a lot of steel to do it. That is why companies like Vale (VALE) should be in prime position to take advantage. However, this does not seem to be the case, and investors should be a bit worried about what these implications mean for the mining company.
One of the problems that Vale is having is not necessarily the countries that it caters to (we'll get back to that in a while), but the fact that back at home, things are not as solid as they were before. Brazil is in a bad position, to say the least. It is slowing down because of its client economy; China is slowing down as well. It isn't just Vale that's being hit - the whole market seems to be down because it has no one to sell its raw material exports to, and that is a red flag right there for anybody holding stock in Brazilian companies.
While we're on the topic of China, it might be a good time to mention that Vale is experiencing a bit of problem here as well: it is in the midst of a ban to dock in the local harbors and is planning to circumvent that with massive transfer ships that will just sail the ore into the country via smaller ships.
In another angle of the same story, investors might be interested to learn that the majority of the 35 ships that are being commissioned to transfer the ore - the Valemax ships as they are called - are being produced in China, a $2.1B investment for the makers which is, of course, taxable. So, this is a bit of a conundrum for Vale and China. Local producers are calling for the ban because obviously the foreign imports are going to damage their production, but can the Chinese afford to irk a company that has just placed a massive order to one of its local factories? Investors might want to stay tuned to this situation as it develops.
If China was the only problem, then Vale might be all right. Sadly, that doesn't appear to be the case. Australian companies are trying to take a bigger part of the share and they don't seem to be facing the same restrictions that Vale is experiencing back in Brazil. This is bad because if its already dwindling 31% market share drops to a projected 26% by 2016, things are going to get very sticky for Vale and it might not be as strong as it is now.
To add to the pressure, Canada is a trouble spot for the company as well. The company that Vale is using to transport its supplies, Canadian Pacific, is currently dealing with a strike by its workers. This is something that will derail its operations and will cost it time and money in the search for alternative options in terms of transportation. That means Vale will be forced to spend more resources to get the goods from its plants in Manitoba and Sudbury. As they say, it never rains, it pours.
However, if you think that Vale is the only company that doesn't seem to be in a good position, then you might be wrong. It might be a good idea to see how the competition is faring. Rio Tinto (RIO) is still confident that China will need its ore and it will even plan to double its output of ore in the next few years. However, there seems to be no ban on it apparent, so it might be a good strategy for it to do so.
China seems to come up in most of these companies. Another company that is expecting a steady demand of its goods from China, mainly copper and not ore, is Xstrata (XSRAF.PK). Its division head in copper, Charlie Sartain, is adamant that the demand will improve. The industry hopes his assessment is correct.
Another big rival for Vale is BHP Billiton (BHP). Its Euro 2 Billion note has been rated A+ by Standard and Poor's based on its solid performance and it will stand to profit from the Australian problem that will hound Vale in the near future, as was mentioned above. Good news for the competitors is bad news for Vale, because the more money it can gather for capital, the better BHP will be positioned to undercut Vale's production.
One of the biggest hedge funds in the world, worth about $120B in investments, has just recently dumped stock in Cliffs Natural Resources (CLF) to take away its exposure in coal and iron ore. What does this mean? One thing is for sure, if a hedge fund worth that much suddenly decides to liquidate its shares in a company, it is not good for that company at all.
Cliffs, however, has some very interesting and potentially groundbreaking projects lined up. If the Black Thor project, a $3.3 billion plan to build a chromite mine deep in the Canadian wilderness, comes to fruition, Cliffs is in for a huge payday. However, JPMorgan Chase's (JPM) mining analyst is weary about the potentials of the project, noting that the cost of the project has tripled. The bank's hesitancy should have some worried. The industry awaits collectively for news on the project.
It's no wonder that Vale got downgraded to an "underperform" rating by Zacks, based on the problems and the slowing down of growth. Even though other experts say that Vale is the best buy out of the weak Brazilian market and there is interest in its natural gas from another company, the assessment seems to be as clear as daylight: if you have stock in this company, sell now and sell hard. This company might be headed for a downward spiral and you do not want to be there when it happens. Pick it up when it is undervalued, but for now, leave it alone. It isn't worth your time or money to keep around.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.